Resolving international construction disputes – litigation or arbitration?

by Reed Smith
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[author: Gordon F. Bell]

Introduction

As we have discussed in previous alerts in this series, many claims can arise under international construction contracts. Of course, not all those claims end up in a formal dispute. In the last alert we described various methods for resolving disputes without the need for formal proceedings; in this alert we look at litigation and arbitration, a private method of formal dispute resolution.

International Construction Disputes – Litigation or Arbitration

Until recently, arbitration was part of the growing trend towards ADR. In other words, arbitration was an alternative to the formal litigation process. However, in the last ten years, arbitration has in many respects become so similar to litigation that ADR is now seen as the alternative to both litigation and arbitration. That said, there remain a number of important differences between litigation and arbitration.

Litigation involves courts. Where parties to a contract have failed to agree otherwise, any unresolved disputes must be decided by national courts. Arbitration, however, is something which is positively chosen by the parties – usually in the underlying contract – and, if the choice has been properly made, then most national courts around the world will enforce the arbitration agreement and will not interfere with the arbitral process.

In international infrastructure projects – where quite often one party is local and the other is international – contracting parties favour arbitration ahead of litigation. There are a number of reasons for this.

First, there is obvious neutrality about the arbitral process. That is not to say judges around the world are necessarily biased towards local parties. However, for a party unused to a local law system or the local courts, there is an obvious desire to level the playing field so that neither party has any hint of an advantage over its opponent. With arbitration, the local courts (and local judges) should have no direct role in the dispute resolution process, although they should support the arbitral process, where necessary.

Secondly, there is the competence and experience of the members of the arbitral tribunal. Again, that is not to say that judges around the world lack the competence and/or experience to resolve construction disputes. However, there is a recognition that many construction disputes involve detailed technical issues which benefit from the experience of those who deal with construction cases on a regular basis. In some jurisdictions, judges will deal with family law matters, criminal cases, corporate disputes and employment issues at the same time as they may hear the occasional construction dispute. In arbitration, the parties are free to choose the tribunal members themselves and they will tend to choose specialist construction lawyers or engineers to determine their disputes.

Thirdly, arbitration provides confidentiality. Litigation – proceedings in court – is generally open to the public and the disputes are determined by judgments which are public documents. On the other hand, arbitration is (in most cases) private and confidential between the parties. This is important to owners and contractors alike, neither of whom will wish third parties to have knowledge of the dispute or its outcome.

Fourthly, there is an issue of enforcement. At the end of a piece of litigation, the court hands down a judgment. In arbitration, the tribunal renders an award. Subject to any right of appeal or challenge, arbitral awards are (generally) much easier to enforce, through the New York Convention (its full title being the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards). Through national legislation, around 150 countries have ratified the terms of the New York Convention which, in effect, ensures that an arbitral award which has been properly made in a state which has ratified the convention will be recognised and enforced in another such state. Judgments of courts do not fall within the scope of the New York Convention. As such, court judgments may only be enforced in foreign jurisdictions if there is a specific arrangement which deals with the recognition and enforcement of judgments between the country in which the judgment is made and the country in which it is to be enforced. Such arrangements do exist, but not on the same scale as the New York Convention.

Cost and speed were once considered the biggest advantages of arbitration over litigation. This has become questionable in recent years although it depends on the facts.
It is true that the courts in some jurisdictions have heavy backlogs of cases and delays of several years are common. In one jurisdiction it has been said that litigation is commenced by the grandfather, for the benefit of the grandson. In other countries, for example, in England, a construction dispute can easily be dealt with by the Courts in an 18 month window. A typical construction arbitration with an experienced tribunal and willing parties should be concluded within an 18-30 month window. Although that may not seem quick, it measures favourably with many court systems.

Cost, however, is another issue. There is no doubt that the cost of arbitration is spiraling. Many conferences, many surveys and many articles question why this is so. The answer often falls at the feet of the lawyers. The cost of arbitration must be controlled otherwise a process which is a very sensible way to resolve international disputes will lose its way.

Challenges and Limitations when Drafting Arbitration Agreements – Getting it Right

The agreement to arbitrate is usually included in the underlying contract (such as the construction contract or the consultants’ contracts). Like all contractual terms, the drafting has to be careful, particular if the intention is to ensure sub contractors or the professional team can be brought into the same arbitration proceedings.

Once contracting parties have made an agreement to arbitrate most courts will treat that agreement as binding and will not allow the parties to withdraw from that arrangement.
Conversely, only parties who have agreed to arbitrate are bound to do so. Therefore, unless a sub-contractor or a member of the professional team has agreed with both the contractor and the owner (perhaps through a "string" arbitration agreement) to take part in a three way arbitration, it is unlikely that all relevant parties involved in a construction dispute can take part in the same arbitration. This is an obvious disadvantage of arbitration in construction projects given that there are no similar problems with litigation, but this is the nature of a consensual process.

The options for the parties are generally to choose between an arbitration which is administered (for example by the ICC, DIAC, SIAC or the LCIA) and one which is said to be ad hoc (perhaps under the UNCITRAL Rules). There are advantages and disadvantages of both depending on the parties and the project.

ICC (and sometimes LCIA) arbitrations can be criticised for being expensive but that criticism is often unfair. The question the parties should ask themselves first is whether the ICC (or any of the other institutional) Arbitration Rules are appropriate for the type of disputes likely to arise under the contract; if they are, the ICC, and the LCIA, are very good bodies to administer the arbitration.

Because UNCITRAL arbitrations are not administered, more emphasis is placed on the parties and the tribunal (particularly at the outset) to move the process along but, in reality, the UNCITRAL Rules work as well as any others.

If parties wish to adopt the arbitration rules written by third parties (such as the ICC, the LCIA or UNCITRAL), there are standard clauses which can be included to ensure the agreement is properly concluded. Moving away from the standard clause can present traps for the unguided and this should only be considered on advice from specialists.

The second thing to consider is whether parties wish the arbitration to be resolved by one or three arbitrators. There is a cost and time issue involved. Obviously, paying for three arbitrators will cost more than paying for one but it is also more difficult to co-ordinate the diary of three busy individuals. Most arbitration agreements in international construction projects favour three arbitrators but that is perhaps more out of laziness rather than forethought as to the types of disputes likely to arise on a project and the valuation of such claims. Helpfully, both the ICC and the LCIA Rules allow the parties to stay silent on the number of arbitrators allowing the decision to be made (by the parties or the ICC or the LCIA) once the nature of the dispute is known.

Where there are three arbitrators, one will be nominated by each party. The third arbitrator – or the sole arbitrator where the parties have elected for a one person tribunal – will usually be chosen by a third party. Depending on the agreement of the parties, that person is usually chosen by an institution (such as the ICC, the LCIA or a court) or, in the case of a three person Tribunal, often by the party nominated arbitrators.

Finally, consideration should be given to the "seat" of the arbitration. The seat of the arbitration is usually described as the legal rather than physical place in which the arbitration is conducted (although, physically, arbitrations are usually conducted at the seat). The seat is usually a city such as London, Paris, Singapore Stockholm, Cairo, Dubai, Vienna or Geneva. The choice of seat often forms part of the procedural law of the arbitration (which will work alongside any arbitration Rules adopted by the parties). If the seat is not agreed by the parties, it will be determined by a third party, often the arbitrators themselves.

Choice of Arbitrators – a Critical and Defining Stage

The arbitrators decide disputes. It is therefore surprising how often arbitrators are appointed without a great deal of consideration by the parties.

Having chosen arbitration over litigation, the parties are free to nominate or appoint the arbitrators they think appropriate to decide their claims. In construction cases, this usually means lawyers with construction experience, or engineers with relevant technical experience in relation to the issues the subject of the dispute.

That said, there is a limited number of very good arbitrators who might be considered for appointment in a construction dispute. As a result, the best arbitrators tend to be the busiest. This can add to the time it takes to complete an arbitration. A balance therefore needs to be struck between availability and quality.

Above all, arbitrators must be both independent of the parties and impartial. Before their appointment, arbitrators are usually required to make such a declaration. Appointing an arbitrator who is not independent or impartial should be avoided since there is a good prospect that any award which is made by a tribunal in such circumstances, will be open to challenge. Furthermore, where there is a genuine disagreement between the members of a three person tribunal, an arbitrator who is not independent or who has not acted impartially will almost certainly have less credibility in the discussions before the award is rendered.

Tactically, getting the right panel of arbitrators often takes subtlety and skill. It is not something which should be rushed (although adherence to time limits is required) and it is something which should always be undertaken with the help of the lawyers appointed by the parties to represent them in the arbitration.

The Arbitral Process – What to Expect

Although the arbitration process will vary depending on the arbitration rules adopted – as well as the identity of the parties and the complexity of the facts – in all cases the process is judicial in nature in the sense that the tribunal must decide disputes based on the facts and the law.

Arbitrators are not mediators. As such, evidence will be presented to the tribunal from factual witnesses (such as the project manager, the construction manager, site supervisors etc) and expert witnesses (perhaps in process engineering, programming/scheduling and quantum) who will be cross examined by the lawyers for the opposing side.

The parties will also present the contemporaneous documentation to the tribunal, either voluntarily or through orders for disclosure.

Legal submissions will be made both in writing and orally and the tribunal may raise questions itself.

At the end of the process, and having heard the evidence, the tribunal must establish the facts of the case and make decisions based on the applicable law. At that point, the tribunal will render its award.

Although, with the will of the parties and the good sense of the lawyers, a construction arbitration could be completed within 12-18 months, the process at present seems to result in arbitrations taking between 24–30 months to complete. As always, there are exceptions.

The costs of arbitration will vary. Competent and experienced lawyers should be able to apply effective methods to control costs but it is true to say that more has to be done by the legal community to achieve these aims.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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